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  • Alex Pettee, CFA

Mall Recovery? • Supreme Decision • Construction Cools

Summary

  • U.S. equity markets were little-changed Wednesday as investors digested another busy day of commentary from Fed members and economic data as well as a potentially consequential Supreme Court decision.

  • Following two days of gains, the S&P 500 finished lower by 0.1% today while the both the Mid-Cap 400 and the Small-Cap 600 each gained 0.1%. The Nasdaq set another record-high.

  • Real estate equities were mixed today as the Equity REIT Index finished lower by 0.2% with 10 of 19 property sectors in positive territory while Mortgage REITs gained 0.1%.

  • Despite the worsening housing shortage, new home construction in the United States moderated from historically-strong levels. As builders have been forced to delay incremental projects due to supply chain shortages.

  • Pennsylvania REIT (PEI) surged 15% after the mall operator noted that traffic throughout its portfolio in May exceeded 90% of May 2019 levels. Half of its properties, however, still recorded sales below 2019-levels.

Real Estate Daily Recap

U.S. equity markets were little-changed Wednesday as investors digested another busy day of commentary from Fed members and economic data as well as a potentially consequential Supreme Court decision. Following two days of gains, the S&P 500 finished lower by 0.1% today while the both the Mid-Cap 400 and the Small-Cap 600 each gained 0.1%. Real estate equities were mixed today as the Equity REIT Index finished lower by 0.2% with 10 of 19 property sectors in positive territory while the Mortgage REIT Index finished higher by 0.1%.

The focus today was Fannie Mae and Freddie Mac, which tumbled following a Supreme Court decision that will likely maintain government support for the GSEs, a potential win for the mortgage and broader housing industries. Eight of the eleven GICS equity sector finished lower today, dragged on the downside by the Utilities (XLU), Materials (XLB), and Consumer Staples (XLP) sectors. Within the Hoya Capital Housing Index, a solid day from Residential REITs offset pressure on homebuilders following New Home Sales data and ahead of earnings this afternoon from KB Home (KBH).

Despite the worsening housing shortage, new home construction in the United States moderated from historically-strong levels, confirming that some builders have been forced to delay incremental projects due to supply chain shortages while marginal buyers have been more hesitant to enter the market amid soaring prices. The Census Bureau reported this morning that New Home Sales fell in May by nearly 6%, but this was still nearly 10% higher from last year. We've discussed in our Earnings Recap how homebuilders reported the largest backlog on record in Q1 and, due to constraints on materials and labor, have struggled to keep up with demand. The Monthly Supply of Newly Completed Houses in the United States dipped to 3.5 months in May, which remains near historic-lows.

Commercial Equity REITs

Hotels: Pebblebrook Hotels (PEB) gained roughly 2% after providing a business update in which it noted that it expects to reach positive adjusted FFO in Q3 2021. The firm commented that "operating trends are improving every week, with leisure demand continuing to show robust growth and business travel recovering." The latest TSA Checkpoint data showed that domestic travel - which bottomed last April at less than 5% of pre-pandemic levels - has recovered to around 75% of pre-pandemic levels.

Malls: Pennsylvania REIT (PEI) surged 15% after providing a business update in which it noted that traffic throughout PREIT's portfolio in May exceeded 90% of May 2019 levels. Despite the recovery, however, half of PREIT's managed properties still recorded sales below 2019 levels even as overall retail sales have set a series of record-highs this year. Rent collection has seemingly recovered back to "normal" levels, however, as the company reported that it collected 149% and 119% of billed rents in April and May, respectively, reflecting some degree of collection of deferred rents from last year. During Q1, PREIT reported that it collected roughly 80% of rents.

Mortgage REITs

Per our Mortgage REIT Tracker available to The REIT Forum subscribers, residential mREITs finished lower by 0.3% today but remain higher by 1.6% this week. Commercial mREITs gained 0.3% today to push their week-to-date gains to 2.4%. Sachem Capital (SACH) finished higher after announcing that it will issue a new Series A Cumulative Redeemable Preferred Stock which will likely be priced later this week. The issue will be the first preferred issue from SACH, which currently has three outstanding exchange-traded "Baby Bonds" that have an average current yield of around 7.0%.

REIT Preferreds & Capital Raising

Per the REIT Preferreds & Bond Tracker available to The REIT Forum subscribers, REIT Preferred stocks finished higher by 0.13% today, on average, but underperformed their respective common stock issues by an average of 0.26%. So far in 2021, REIT Preferred stocks are higher by 9.43% on a price return basis. The average REIT preferred currently pays a dividend yield of 5.97% and trades at a slight premium to par value. Over in the bond markets, Essential Properties (EPRT) priced a public offering of $400M principal amount of 2.95% senior notes due 2031. Elsewhere, Global Self Storage (SELF) slid more than 10% after it priced its public offering of 1,121,496 common shares at $5.35/share.

Economic Data This Week

The busy economic calendar continues on Friday when we'll see inflation data with the PCE Price Index - the Fed's "preferred" gauge of inflation - which is expected to show that prices are rising at the fastest level in at least a decade. We'll also see Personal Income & Spending data on Friday and a flurry of PMI and sentiment data throughout the week.

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Disclosure: A complete list of holdings and Real Estate and Housing Index definitions and holdings are available at HoyaCapital.com. Hoya Capital Real Estate advises an Exchange Traded Fund listed on the NYSE. Hoya Capital is long all components in the Hoya Capital Housing 100 Index.

Additional Disclosure: It is not possible to invest directly in an index. Index performance cited in this commentary does not reflect the performance of any fund or other account managed or serviced by Hoya Capital Real Estate. Data quoted represents past performance, which is no guarantee of future results. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy.

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